Tuesday, January 25, 2011

The New BRICS on the Block: Which Emerging Markets Are Up and Coming?

Yeah, yeah emerging markets are overbought, all the action's going to be in the developed economies, blah, blah, blah.
Here's Knowledge@Wharton:

Building on the foundation of the well-known BRIC countries -- Brazil, Russia, India and China -- a new set of up-and-coming emerging markets is gaining attention. The so-called "CIVETS" countries -- Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa -- are now touted as hot markets because they have diverse economies, fast-growing populations, relatively stable political environments and the potential to produce outsized returns in the future.

Far-flung geographically and shaped by vastly different cultural, religious and political structures, the CIVETS show the potential to develop rapidly and reward those willing to take on emerging market risk beyond the more-established BRIC countries, experts say.

The BRICs were christened a decade ago by Goldman Sachs then-chief economist Jim O'Neill. Goldman Sachs now predicts that the BRIC's combined GDP will surpass U.S. GDP by 2018 and that they will account for half the global economy by 2020. The CIVETS owe their acronym to the Economist Intelligence Unit (EIU), which forecasts the countries will grow at an annual rate of 4.5% during the next 20 years. That's only slightly below the 4.9% average predicted by the EIUfor the BRIC nations, and far above the rate of 1.8% forecast for the world's richest -- or "G7" -- nations. (For what it is worth, a civet is a nocturnal, cat-like mammal found in at least two of the CIVETS countries -- Indonesia and Vietnam.)

In a recent survey conducted by Knowledge@Wharton and the global communications firm Fleishman-Hillard, a majority of corporate executives, investors and business leaders indicated that they would be interested in doing business with multinationals in the CIVETS countries. Respondents said they were most attracted to CIVETS because of low labor and production costs and the countries' growing domestic markets. When asked to identify weaknesses, the survey participants cited political instability, corruption, a lack of transparency and infrastructure, and homegrown companies without much of a reputation or brand identification.

According to Wharton management professor Witold Henisz, while there are a total of 150 emerging markets worldwide, a catchy name and new focus may give multinationals and investors more incentive to look toward these lesser-known countries. "An acronym is a simplification, but it calls attention to growth opportunities in rapidly growing markets abroad that managers need to come to understand," he says.

The Knowledge@Wharton/Fleishman-Hillard survey of 153 corporate and business leaders found a range of enthusiasm for different CIVETS. When asked to say which of the six countries offered a "great deal of opportunity" or "some opportunity," 86% cited Indonesia, followed by South Africa (84%), Turkey (82%), Vietnam (77%), Egypt (61%) and Colombia (56%). A significant set of respondents (42%) predicted that by 2020, the CIVETS countries would be on a level playing field with the BRICs in the global economy.

When compared to the BRICs, the CIVETS are much smaller. Indonesia is, by far, the largest with 242.9 million people, followed by Vietnam with 89.5 million, Egypt (80 million), Turkey (77 million) and Colombia (44 million). By contrast, Russia has a population of 139 million, Brazil has 201 million, India 1.2 billion and China 1.3 billion.

'Frontier Markets'

Henisz says size is one reason the decision to invest in the CIVETS countries is not as clear-cut as it is with the BRICs. A Western company might be willing to accept some missteps in China because the rewards would be so great given China's size. Entering a CIVETS country, however, is a more complicated strategic decision, he notes, and will probably come with added pressure for short-term results, compared to larger countries where companies might be willing to stay the course. "China is so critical that if you mess up the first year, you can stay around. That's not so clear about, say, Colombia -- it's not seen as mission critical."...MORE